Taiwan Bonds Advance Before Rate Decision Amid Europe Concerns

Taiwan’s government bonds rose,
halting a three-day drop, as economists predict the central bank
will keep its benchmark interest rate unchanged for a seventh
straight meeting as growth falters. The currency advanced.

Ten-year note yields approached a two-week low as stocks
tumbled amid concern Europe’s debt crisis will escalate. Reports
this month showed the island’s industrial production shrank in
February and export orders fell by the most since May 2009. The
central bank will hold the discount rate for 10-day loans at
1.875 percent today, according to all 20 economists in a
Bloomberg News survey.

“Current interest-rate levels in Taiwan are accommodative
enough,” Frances Cheung, a Hong Kong-based strategist at Credit
Agricole CIB, wrote in a research note to clients today.
Inflation is benign and recent data “has been disappointing,”
with the central bank likely to stay put today, she said.

The yield on the 1.125 percent bonds due March 2023
declined two basis points, or 0.02 percentage point, to 1.298
percent as of 10:11 a.m. in Taipei, according to Gretai
Securities Market. That’s the lowest since March 18.

The central bank has kept its key rate at 1.875 percent
since June 2011. Governor Perng Fai-nan said in a December
policy review that growth will be “steady and slow” in 2013,
citing European and U.S. debt issues. The overnight interbank
lending rate was steady at 0.388 percent, a weighted average
compiled by the Taiwan Interbank Money Center shows.

Inflation Outlook

Consumer prices jumped 2.97 percent in February from a year
earlier versus 1.13 percent in January, the government said on
March 5. Economists forecast inflation will average 1.4 percent
next quarter, a Bloomberg survey shows.

Taiwan’s dollar gained 0.2 percent to NT$29.890 against its
U.S. counterpart, according to Taipei Forex Inc. One-month non-
deliverable forwards were little changed at NT$29.881.

One-month implied volatility in the Taiwan dollar, a gauge
of expected moves in the exchange rate used to price options,
declined five basis points to 3.49 percent, according to data
compiled by Bloomberg.

Taiwan’s central bank has sold the local currency in the
run-up to the close on most days in the past year, according to
traders who asked not to be identified.